M&A activity and the capital structure of target firms

0531082 - NHÚ 2021 RIV CZ eng V - Research Report
Flannery, M. J. - Hanousek, Jan - Shamshur, Anastasiya - Trešl, Jiří
M&A activity and the capital structure of target firms.
Prague: CERGE-EI, 2020. 46 s. CERGE-EI Working Paper Series, 661. ISSN 1211-3298
Institutional support: RVO:67985998
Keywords : M&A * target capital structure * leverage deficit
OECD category: Applied Economics, Econometrics
https://www.cerge-ei.cz/pdf/wp/Wp661.pdf

Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly – within a year of the acquisition. The typical over-levered firm adjusts its debtto-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms’ pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to overleveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
Permanent Link: http://hdl.handle.net/11104/0309830